Margin Call Definition
A margin call is a requirement by a broker that an investor deposits additional money or securities into their margin account to meet the minimum margin requirement because of unfavorable price movements in the held securities. It occurs when the account’s equity, as a percentage of the total market value of securities, falls below a certain stipulated percentage.
Margin Call Key Points
- A margin call is triggered when the value of an investor’s margin account drops below the broker’s required amount.
- It refers to the broker’s demand that an investor deposit additional money or securities into their margin account to bring the margin up to the minimum maintenance margin.
- A Margin Call is a risk that investors face when they use leverage to invest in securities.
What is a Margin Call?
A margin call is a broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin trading refers to the practice of borrowing funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.
Why does a Margin Call occur?
A margin call is triggered when the value of an investor’s margin account, which contains securities bought with borrowed money, falls below the broker’s required amount. This could occur due to a decrease in the value of the purchased securities, an increase in the margin requirements by the broker, or a combination of both.
When does a Margin Call happen?
A margin call usually happens when the market is bearish, and the prices of held securities fall significantly. Once the percentage of an investor’s equity to the total market value of securities falls below the margin maintenance—usually between 25 and 40 percent—the broker makes a margin call.
Where does a Margin Call apply?
Margin calls apply in margin trading, used by investors to amplify their trading results. This technique can be applied in various places, including stock markets, forex markets, commodities markets, cryptocurrency markets, or anywhere leverage is allowed.
How does a Margin Call work?
Should a margin call take place, the investor must either deposit more money into the account or sell some of the assets held in the account. If the investor fails to bring their equity up to an acceptable level in time, the broker may liquidate securities in the account at the market price until the maintenance margin requirement is satisfied.
